Does the Introduction of Index Futures Stabilize Stock Markets? Further Evidence from Emerging Markets

We examine how the introduction of index futures affects the stability of stock markets in seven emerging countries by studying the existence and the impact of positive feedback trading in both pre- and post-futures periods. Consistent with the findings in advanced markets, positive feedback traders are already prevalent before the introduction of index futures in six out of the seven markets studied. After the introduction of index futures, signs of positive feedback trading emerge in only two markets (India and Poland). In contrast to the evidence in developed markets, positive feedback traders migrate from spot to futures markets in four markets, which suggests that the introduction of index futures may destabilize some emerging stock markets. Another interesting finding is that positive feedback trading is more intense during market declines in the majority of the markets.